"Purchase applications were little changed on an unadjusted basis last week, but this is the time of a year we would expect a significant pickup in purchase activity, and we are not yet seeing it," said Mike Fratantoni, the association's chief economist.

Total application volume fell 8.5 percent on a seasonally adjusted basis from a week earlier, while the Refinance Index was down 11 percent from the previous week.

The seasonally adjusted Purchase Index decreased 4 percent from one week earlier, to the lowest level since 1995.

While higher rates have pushed refinances way down from their boom levels, causing banks to fire employees, applications to buy a home were expected to rise. They are now down over 15 percent from a year ago, however.

Unusually bad weather has been blamed for weak home sales and buyer traffic in much of the nation this winter, but sales in January fell the most in the West, where weather was not a factor.

Mortgage rates have vacillated in a narrow range, rising last week from an average 4.50 percent on the 30-year fixed conforming loan to 4.53 percent on the MBA survey. Credit availability and tighter underwriting have been far higher barriers to entry this year than rate, especially for first-time home buyers, who have played little to no role in the housing recovery.

"We're in a critical juncture in housing, and it started when rates went up a small 1 percentage point back in June," housing analyst Mark Hanson told CNBC on Tuesday. "We're going from an investor-led housing market to an end user-led housing market, and that's creating a lot of problems."

Investors drove home prices on the low end higher and faster than most had predicted. As they retreat from the market, regular buyers—who largely rely on credit—are facing shrinking affordability on top of extremely low inventory.

Rising prices have brought thousands of borrowers above water on their loans, allowing them fto list their homes and move, but not enough have chosen to do so. Demand is strong, but with too few homes for sale, prices will continue higher, albeit at a slower pace given higher mortgage rates this year.